The Pension Protection Act of 2006
By: Scott L. Keller, CFA
The Henssler Financial Group Position Paper

The Pension Protection Act of 2006 made significant changes to the rules governing retirement plans. While small businesses with Individual(k), SEP or Simple plans will be affected, business owners with 401(k) and profit sharing plans also need to take note, as the new law affects nearly every plan sponsor and plan participant. Now is the time for business owners to have their company-sponsored retirement plan evaluated so that they understand how the law will affect them.

The act was designed to force employers to solidify their pension plans, as many defined benefit pension plans are underfunded. Many traditional pension plans are facing a situation where the promised benefits outweigh the available funds. The new law provides strict funding guidelines for traditional pension plans, and makes some of the provisions for retirement and educational savings from the Economic Growth and Tax Relief Reconciliation Act of 2001 permanent.

However, the law also included provisions for defined contribution plans, such as 401(k) and 403(b) plans. These extensive changes impact minimum vesting rules for employer non-elective contributions, impose diversification requirements on employer securities held by plans, provide investment-related guidance and encourage automatic enrollment, among other changes.

Plan administrators must provide benefit statements to participants and beneficiaries at least quarterly in plan years beginning after December 31, 2006. The statements must include the participant's balance in each account or fund to which the participant has a current allocation, current vesting status, restrictions on investment allocations, if any, and an advisory statement on maintaining a diversified and well-balanced portfolio.

To further supplement such advisory statements, employers who sponsor 401(k) and other qualified plans are now allowed to make professional investment advice available to participants. Safeguards have been included to prevent conflicts of interest, and other requirements ensure that participants receive trustworthy advice on selecting appropriate investments for their unique financial situation.

The Economic Growth and Tax Relief Reconciliation Act of 2001 introduced the Roth 401(k) and 403(b) plans, which became effective in 2006. Similar to a Roth IRA, these plans allows employees to contribute after-tax dollars and withdraw them — and earnings — income tax free in retirement. Previously, Roth 401(k) and 403(b) plans were set to sunset in 2010. Now the 2006 legislation makes these attractive tax features permanent. Business owners may want to amend their current retirement plans to include the Roth provisions.

Further amendments to company retirement plans include the ability for employers to automatically enroll their employees into a 401(k) retirement plan with default contribution levels. Employees will need to opt out of the plan if they do not wish to utilize the company's 401(k) as a retirement savings vehicle.

While this is a brief overview of some of the changes the Pension Protection Act of 2006 created that businesses should be concerned with, the act also created several benefits for individuals with expanded portability rules, penalty-free withdrawals for military personnel who are called to active duty, and tax free distributions made directly to charitable organizations, to name a few.

As a business owner, if you are concerned with increasing the efficiencies in your retirement program, please call The Henssler Financial Group at 770-429-9166. We can help you bring your retirement plans into compliance with the new laws, as well as offer ways to bring your participation rates in line with industry standards. Most people know they need to save more for their future. We can help your company provide incentives to your employees to do so.